(Bloomberg News) In 2005, Stockton, California, unveiled a gleaming new arena and ballpark on its riverfront, part of a $145 million plan to draw people downtown. The city east of San Francisco, a shipping hub for wine and almonds, is now negotiating with creditors to stave off bankruptcy.

The 10,000-seat arena, a glass-walled symbol of the city's fight against a soaring crime rate and downtown blight, was one piece of a redevelopment boom that also saw the addition of a 5,000-seat minor league ballfield, a 650-space parking garage, a 66-slip marina and the purchase of an eight-story City Hall.

"This is the project that's going to bring folks home, and it's going to bring people from around the region to Stockton," then-Council Member Leslie Martin said in 2004 when the waterfront revival was approved.

Today the new City Hall stands empty because the government can't afford to move in. The parking garage may be seized by creditors because the city defaulted on $32.8 million in bonds.

The shopping spree contributed to the $319 million in debt, financed mostly with seven bond issues from 2003 to 2009, tied to its general fund -- the pool of money used for most day-to- day operations, equivalent to having loans backed by the contents of a checking account.

By the end of this February, Stockton found itself on the verge of insolvency from mounting retiree costs, the recession and accounting errors, City Manager Bob Deis told reporters.

Municipal Bankruptcy

The city, about 80 miles (130 kilometers) east of San Francisco, said it would default on $2 million in bond payments and begin negotiations with creditors, the first hurdle under an untested state law restricting municipal bankruptcy.

If negotiations fail, Stockton, with a population of about 292,000, stands to become the largest U.S. city to seek Chapter 9 protection. It would join Central Falls, Rhode Island, which filed in August after failing to win union concessions, and Jefferson County, Alabama, which turned in the biggest municipal bankruptcy in U.S. history in November, with $4.2 billion in debt.

State Controller John Chiang informed Stockton officials yesterday that his staff would begin an investigation into the city's financial practices as early as May. The city's ability to provide reliable and accurate financial data "is questionable," Chiang said in a letter to Deis.

Since the 1980s, the city had struggled to draw people downtown as homicides, which hit a record of 55 in 1992, emptied the streets and prompted stores to move to suburban malls. The record was surpassed last year when killings rose to 58, or more than one a week.